ACCA · Question 32 · Performance measurement and control

Section C - Constructed Response 2

AeroParts Multi is a cross-border multinational company.
Division A is located in Country X (Corporate tax rate: 30%). It manufactures a specialized aerospace component.
Division B is located in Country Y (Corporate tax rate: 15%). It assembles these components into finished engines.

Division A's costs for the component:

• Variable cost: $400 per unit
• Fixed cost: $150 per unit
• External market price: $800 per unit

Division A has a maximum capacity of 10,000 units and currently sells 8,000 units to the external market.
Division B requires 3,000 units of this component. Division B currently buys them from an external supplier for $750 per unit.

Head Office wants Division A to supply Division B. Division A's manager refuses to sell for less than the external market price of $800. Division B's manager refuses to pay more than their current external price of $750.

Requirements:
(a) Calculate the minimum transfer price Division A should accept and the maximum transfer price Division B should pay. (6 marks)
(b) Based on your calculations in (a), advise whether a mutually acceptable transfer price exists, and calculate the optimal transfer price from the perspective of the Head Office to minimize global tax liabilities. (6 marks)
(c) Discuss the behavioral and motivational issues that arise when Head Office dictates a transfer price to autonomous divisional managers. (8 marks)